Comparing Stock Sector Metrics by Date Range

Introduction

      The following horizontal bar graphs compare sector performance with four analytical measures for each election. The first is drawdown, which describes a fall in share or portfolio price as a percentage of the peak price for the specified time. The second is volatility, or the standard deviation of returns for the period multiplied by the square root of the number of trading days, estimated at 252 days each year. Multiplying the volatility by 100 allows the bar graphs to report them as percentages. Sectors with lower volatility experience fewer price fluctuations, and vice versa.

      The last two metrics, alpha, and beta, compare sector performance to a benchmark index for the market. This paper uses the S&P 500 index. The alpha metric reports how much better or worse the sector did compared to the S&P 500. For example, if the alpha is 3%, this sector earned 3% more than the S&P 500 did for the period, the opposite is true for negative alpha values. Beta, on the other hand, compares sector volatility to that of the benchmark index. With the index fixed at 1, betas greater than 1 are considered more volatile than the market, and those below 1 are less volatile than the benchmark for that period.

To implement the calculation of these variables in R, several packages are required:

60 Days before and After the 2020 Election


We can see there are significant changes between the two time periods. The Tech sector has greatly improved performance, however, the Healthcare sector does not exhibit the same improvements. We also see that volatility in the financial sector continued to increase where other sectors had decreases in their volatility.

30 Days before and after the 2020 Election


Comparing these time frames to the previous ones, we see an increase in volatility for every sector except for healthcare. We also see the 30 days after measures decrease as it transitions into the 60 day mark. Overall, the sectors are performing decently. There are likely some improvements to be made.

15 Days before and after the 2020 Election


15 days after the election we see the financial volatility peak. This value almost doubles from the volatility 15 days before the election. We had expected to see strong performance in the Healthcare and Tech sectors. The Tech sector improved, but the healthcare sector did not.

Conclusion

      Per Hypothesis I, some sectors do experience increased volatility as proximity to the election increases, primarily the financial and industrial sectors, but this is not seen across the other sectors. Since Biden was the democratic nominee, the tech and healthcare sectors are expected to experience greater performance. The returns on the tech sector prices are greater than the benchmark’s returns for the periods leading up to the election, however, afterwards the returns fall below the market. This is not true for the healthcare sector, whose returns are less than the benchmark for all periods before and after the election. Beta values for the tech sector indicate a decline in volatility compared to the market as the time before the election decreased, eventually resulting in the volatility of the sector falling below the benchmark’s volatility. Along with the reduced drawdown before and after the election, these metrics indicate strong performance in the tech sector. The betas for the healthcare sector show slight increases in volatility before the election and clear increases in volatility after the election. Healthcare drawdown decreases closer to the election but then increases significantly after the election. This sector did not experience the same positive performance as the tech sector.

      Using similar analytical interpretations for the other two sectors, the financial sector had large swings in volatility and drawdown after the election. The industrial sector’s volatility peaked on election day but proceeded to decline steadily afterward. Tech had the greatest improvement in performance compared to the other sectors for this election.